Bank Of England Economist Warns Of An 'Aggressive' Rise In Interest Rates

English inflation has been well above the central bank's target
for four years, though many have excused this away as being due
to higher commodity prices globally, an increased value-added tax
(VAT), or a weaker British pound. It's been perceived as a
temporary phenomenon, and thus not a concern. Thus the central
bank has maintained low interest rates in a bid to stimulate the
economy, even though low interest rates usually risk stoking
inflation.

Thing is, inflation needs to come down soon, because the notion
that it is just temporary is wearing thin explains Spencer Dale,
the chief economist at the Bank of England. The second that
inflation picks up, and the problem becomes chronic in the minds
of worker and consumers, is the moment that England would have to
aggressively hike its interest rates.

"We lose our credibility at our peril – once the genie of
inflation credibility escapes it is costly to put back," he said.
"The response to a possible loss of credibility is clear –
monetary policy would need to tighten, possibly aggressively so."

However, he acknowledged that there was substance to the
concerns. Inflation has been "significantly higher than the 2pc
target" for the past four years, he accepted. "The period of
above target inflation; the fact that inflation has been higher
than expected; and that it is likely to remain above target until
the end of next year all contribute to the risk that credibility
and confidence in the MPC may start to waver."

There's far more uncertainty here than in the U.S., where
inflation has been falling and deflation is the prime concern.
England's peculiar situation, whereby it has above-target
inflation yet maintains an extremely loose monetary policy, means
that the English interest rate environment could change
dramatically in a heartbeat, which has to keep government
bondholders up at night.